Mobilizing Capital in the Low-Cost Private School Sector: Key Insights Two Years into an Innovative Partnership
The world is changing demographically, with a growing divergence between birthrates in the Global North and South moving us towards a future where developing nations become international hubs of culture, commerce and work. But the growth of the youth population in these countries can also cause (or worsen) some key development challenges. To take one example, one in five children in sub-Saharan Africa are out of school, and without effective, scalable solutions, the region won’t meet SDG 4’s goal of education for all, limiting an entire generation’s potential.
Given the context of the growing, unmet demand for education across the developing world, capacity-constrained states are beginning to recognize the value that non-governmental actors bring to education. Non-state schools — which may include private or nonprofit entities that are locally developed and run — are emerging as vital players in supporting overstrained government systems. These schools are filling critical gaps where state education is unavailable or insufficient, ensuring that access to learning reaches underserved regions.
Non-state schools can meet the unique needs of these areas, tapping into the work of entrepreneurial and service-oriented local residents who dedicate themselves to bettering their communities through education. But without sufficient support from financial institutions and the impact investment sector, their ability to meet this need can — and will — stagnate.
In Opportunity International’s 5th annual State of the Affordable Non-State School Sector report, the organization’s Education Finance team estimated that there’s a US $10.1 billion market need for school improvement loans for affordable non-state schools in low- and middle-income countries around the world. Such loans would provide hundreds of thousands of schools with finance that would enable these local entities to accept more children, offer more extracurricular opportunities and increase the quality of their services. Along with capital, the report also highlighted the need for training and capacity support that can enable these schools to effectively use such investments.
Responding to this growing market gap, Opportunity International and Oikocredit entered into an education-specific collaboration at the end of 2021, bringing together the strengths of each institution. Oikocredit is a social impact investor with five decades of experience in promoting sustainable development through investments, focusing its investments on financial inclusion, agriculture and renewable energy. Opportunity International’s 50+ years of working with financial institutions — and developing microfinance products — provides it with specific expertise that can help bring more banks and financiers to the table. The collaboration aims to reduce risk for both financial institutions and schools, creating pathways to millions of dollars in low-cost private capital in Africa, Asia and Latin America by providing loans, equity investments and capacity building. But these efforts go beyond mere financial transactions, aiming to provide a strategic infusion of capital and technical assistance to financial institutions that lend to non-state schools. In the process, the partnership has built a diligent selection process for choosing the lenders it will work with, which reduces risk for all parties involved — including local financial institutions and the schools they lend to. This is fostering a landscape where banks are enabled to either launch or significantly enhance their education sector lending, thereby narrowing the investment chasm.
The collaborative initiative targets 16 countries in Africa, Asia and Latin America, and is poised to improve education for an estimated 2.2 million children across 6,600 schools in some of the world’s most vulnerable and underserved populations. As of September 30, 2024, the partnership had invested in 15 financial institutions that received technical assistance from Opportunity, and they will receive a combined total of $20 million in funding to direct toward loans for schools.
These results are encouraging, but it has taken time to get the ball rolling. Building an infrastructure based on trust and efficiency has required our two organizations to align both our missions and our tactics. But despite these challenges, the partnership is gaining momentum: Of the 15 agreements made with lenders in the last two years, five have been in the last quarter.
As we begin to see the fruits of our labors, we’ve identified several key insights that have been instrumental in building this new partnership and tapping into this $10.1 billion market. We’ll share some of these insights below.
Finding Partners — And Keeping Them on the Same Page
By proactively targeting mission-aligned financial institutions — i.e., institutions dedicated to community development that have experience lending in education — we’ve ensured that our efforts reach those who stand to gain the most: children and communities at the base of the economic pyramid. But finding those partners takes time, and building multi-stakeholder loan products without a mindful understanding of each player’s needs can create more barriers than efficiencies.
To help build the foundation for successful collaboration, we started by fostering a shared understanding of which financial institutions would be able to meet our impact objectives in the education space. It was critical for Opportunity and Oikocredit to align our processes from day one, to ensure that our technical assistance and loan origination processes are in sync. From the beginning, we implemented a series of critical processes to achieve that shared understanding.
These processes began with multiple training sessions for both Oikocredit and Opportunity staff. Timing is everything when it comes to selecting the right financial institutions and closing a successful agreement, so both organizations shared our in-depth processes involving everything from partner selection to loan origination disbursement — including due diligence strategies, market research practices and product development timelines.
These trainings resulted in process mapping strategies between Oikocredit and Opportunity to ensure synergies and streamline processes between the two institutions. Before we even began our outreach to lenders, we developed a memorandum of understanding, creating a shared agreement pertaining to the agreeable market conditions, economic terms and requirements necessary for loan agreements — which ultimately became the bedrock for our financial product designs. This agreement established the basics of what acceptable loan products from our partnering institutions would look like — e.g., interest rates, repayment timelines, etc. When we ultimately selected partners, we used a thorough tripartite agreement template to align terms of activities between all parties, determining how and when Opportunity and/or Oikocredit would engage with a potential financial partner — so as not to overwhelm these partners with redundancies.
These level-setting trainings and collaborative infrastructures created new efficiencies in our hunt for suitable financial partners. In the process, Opportunity has acted as a sort of matchmaker between Oikocredit and local financial institutions, seeking to pair not only the right financial institutions with Oikocredit, but the right financial institutions with the right non-state schools to lend to. Opportunity has also contributed through its EduFinance Technical Assistance Facility (ETAF), which used these joint trainings to fine-tune its search for the right financial partners, and provided valuable insights to help develop technical assistance products to mitigate risk and foster success between financial institutions and schools.
Combining Capital and Capacity Building to Create Lasting Positive Effects
However, finding those institutions is just half the battle. The emerging education finance market has yet to establish institutional norms, and bringing banks and schools up to speed requires new training and other types of support. The technical assistance provided by Opportunity International equips these institutions with the necessary tools to make informed investment decisions that will profoundly impact schools and families.
Through this assistance, ETAF guides partners in developing, launching and expanding their sustainable education lending portfolios. It provides multifaceted technical support, ranging from market research to product design, staff training and portfolio analysis. This support includes access to EduFinance’s proprietary credit algorithm, which is specifically tuned to understand non-state school activities: It leverages borrower data to predict default rates, allowing loan officers to make informed, real-time lending decisions. In addition to ETAF’s support, Opportunity’s business intelligence arm provides monthly portfolio analyses, helping our partners enhance their education finance portfolio management, risk mitigation and profitability.
Collectively, these initiatives — combined with the 20 million in finance we’ve mobilized so far for local non-state schools — are already having a notable impact on partnering lenders and schools. Our partnership with the non-banking financial institution Ed Partners in Kenya provides a good example of how these overlapping initiatives are supporting not only our partners’ business processes, but their understanding of clients’ needs.
As the first non-banking education finance company in Africa, Ed Partners works exclusively with affordable non-state school owners, currently lending to 416 schools in the Nairobi, Nakuru, Meru, Nyeri and Kisumu areas in Kenya. So it was a perfect fit for this new partnership, and its values and mission are deeply aligned with Opportunity and Oikocredit’s goals. As a result, Ed Partners was selected to enter into one of our first partnership agreements.
But though Ed Partners had established a niche lending to area schools, it still needed a way to separate itself from more conventional loan providers in the market. To allow the institution to better compete with these larger banks, the ETAF team conducted market research and recommended that it expand loan access down market to reach parents and families with loans dedicated to school tuition and fees.
Our market research showed that families attending schools in the Ed Partners portfolio were spending up to 30% of their income on school fees, highlighting both a significant financial burden on these households, and a significant risk of nonpayment for these schools — and for Ed Partners. ETAF’s training and support helped the institution create new loan products that would help these families afford education for their children, paying over time and reducing the risk of them having to choose between paying for the semester or paying off a sudden financial burden like an illness.
Thanks to the initial process mapping conducted between Opportunity and Oikocredit, the ETAF team was prepared to perform this sort of training related to marketing, client development and risk management even before our partners’ loans were approved. By the time capital was in the hands of Ed Partners, it was already prepared to enter this new market — and its board has just approved the launch of its newest financial product for 2024: school fee loans for hard-working families. After the success of this collaboration, Ed Partners has recently engaged Opportunity EduFinance to provide technical assistance training and market research to develop the institution’s vision for other education products.
Looking Ahead: Scaling the Impact of Education Finance
These past two years have demonstrated the promise of our unique education finance model, showing that impact investors can work hand-in-hand with financial institutions to provide new avenues for effective development in the education sector. As we continue to see an increase in the number of children out of school globally, we must continue to adapt these models and encourage more financial institutions to come to the table to meet these growing needs.
By developing deeper collaboration between investors, financial partners and their clients, our model builds a shared understanding that aligns these stakeholders behind a longer-term goal: to enable schools to support the most vulnerable households while also building a viable business model. The next steps in developing that viability will involve extending this approach down market, to include the schools themselves. To that end, over the course of this year we will be enrolling the schools in Ed Partners’ lending portfolio into Opportunity’s Education Quality program — a holistic three-year school development program that combines digital, self-accessible content on tablets for school leaders and teacher mentors with highly interactive in-person training and support that empowers teachers and proprietors with new skills to increase school and student performance.
As we move this model forward, the greater question lies in how we scale our success globally. We’re charting paths to bring this innovation to the global stage, ensuring that every child has the opportunity to learn and grow in quality educational settings. To do that, Oikocredit and Opportunity are developing education-specific listening exercises built upon school proprietor surveys and direct interviews with education-focused lenders. This process will enable us to better understand the needs of financial institutions amidst the current uncertain macroeconomic environment, and to adjust our collaborations with these institutions accordingly.
As we continue to build momentum in this space, we are excited to have found an approach that works as well in the classroom as it does in the bank: trust-based relationships and a commitment to growth and support. By committing to partnerships that foster a nurturing environment, investors, financial institutions and schools can work together to provide sustainable impacts.
Mauricio Rincon leads Opportunity International’s impact investing and capital solutions efforts; Alvaro Ma is Global Senior Investment Officer in Oikocredit International’s Innovation Hub; and Mathieu Fourn is the EduFinance Technical Assistance Manager at Opportunity International EduFinance.
Photo credit: Ben Grey, via Flickr.
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